NWE diesel price spreads point to tighter supply

Northwest European diesel premiums to crude, jet fuel and intermediate feedstocks all hit their highest in more than a month last week, as did the backwardation structure in the forward curve, affirming indications from traders that supply is substantially tightening.

Diesel cargoes delivered to the Amsterdam-Rotterdam-Antwerp (ARA) trading and refining hub priced at an $18.97/bl premium to North Sea Dated crude on Friday, 2 June, the highest since 13 April. Front-month Ice gasoil futures were at an $8.25/t premium to the second month on 1 June, the widest since 12 April. Higher values for these spreads typically indicate tighter prompt supply.

Diesel barges loading promptly at ARA priced at a $6.75/t premium to front-month Ice gasoil futures on 30 May, the highest since 24 March. Because the futures contract can be physically delivered on ARA barges, this can be seen as a measure of backwardation and a higher value points to tight prompt supply. Barges were at a $6/t premium to futures on 2 June, even as the latter's expiry drew nearer. That suggests the spread was actually growing steeper, after adjusting for the narrowing time component.

Diesel was at a premium of $2.36/bl against jet fuel in northwest Europe on 30 May, the highest since 17 April. On 2 June diesel reached a premium of $12.15/bl against high-sulphur vacuum gasoil (VGO), refiners' primary intermediate feedstock for hydrocracking to raise diesel yields, the highest since 31 March.

Traders said availability of diesel cargoes in northwest Europe is growing slimmer because shipments from east of Suez have slowed since May. This flow has been by far the leading source of EU diesel imports since the bloc banned Russian supply in February. Refinery turnarounds in Asia-Pacific, combined with lower Chinese diesel exports, are keeping more Middle Eastern and Indian cargoes away from Europe.

Vortexa data show diesel and gasoil loadings from the Middle East for Europe, Egypt and Morocco slowed to 65,000 t/d in May from 113,000 t/d in April. Large shipments regularly are regularly broken up in Egypt and Morocco for re-export to Europe. The slowdown appears to have tracked slumping incentives: Europe's front-month Ice gasoil futures averaged a premium of less than $15/t against front-month Singapore gasoil swaps in May, down from around $20/t in April and $32/t in March.

Some European traders said diesel demand remains weak, underlining the view that the steeper spreads are being driven by supply. The key force suppressing demand is slow industrial activity: Eurozone manufacturing purchasing managers' indexes (PMIs) have indicated contraction in every month since last summer. But some traders said there is a structural trend involved, as the growing popularity of gasoline hybrid vehicles have gradually removed diesel's share of the road fuel market.

By Benedict George